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Trading Silver with Options: How to Earn 127% in Four Months

February 17, 2012

By Larry D. Spears, Contributing Writer, Money Morning

If you listened to Money Morning's recent special report from global resources expert Peter Krauth, you know the long-term outlook for silver is decidedly positive.

Soaring investment demand, continued industrial use, a growing supply shortage, and falling ore quality all signal a sharply bullish outlook for the "poor man's precious metal."

So, how can you position yourself to profit from silver's coming advance without exposing yourself to the excessive risk?

One way is to use options – either on silver futures contracts or shares of silver-related stocks and exchange-traded funds (ETFs) – in a strategy that strictly defines and limits your risk while still offering short-term returns of 100% or more.

Silver Options: How to Create a Bull Call Spread

Known as a "bull call spread," this technique involves simultaneously buying and selling two call options with the same underlying security and expiration date, but with differing strike prices.

Typically, a bull call spread involves buying an at- or slightly in-the-money call option – one with a strike price very near the current price of the underlying asset – and simultaneously selling an out-of-the-money call option with a strike price several increments above the current security price.

The difference between the two strike prices is referred to as the "spread."

To illustrate, let's look at an example using options on silver futures, which are traded in the CME Group's Comex division. In this case, one futures options contract represents 5,000 ounces of silver.

To create your bull call spread, you would purchase the slightly in-the-money July $33.00 call, quoted at $3.451 an ounce ($17,255), and simultaneously sell the out-of-the-money July $35.00 call at a price of $2.572 an ounce ($12,860).

The net cost of this spread is 87.9 cents an ounce ($3.451 – $2.572 = $0.879), or $4,395. That is also your maximum possible loss on the trade should the July silver future stand below $33.00 when the options expire on June 26, 2012.

What's more, the spread trade breaks even at a July silver futures price of just $33.879 as opposed to the break-even price of $36.451 had you merely purchased the $33.00 call alone.

So, what's the catch?
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Special Report: How to Buy Silver

January 5, 2012

[Editor's Note: Silver surged 5.9% on Tuesday, netting its biggest one-day gain in months. And that's just the beginning of what will almost certainly be another big year for the white metal. With that in mind we wanted you to have this free report on how to buy silver. It's one of the most common questions we get from readers - and it's easier than you think.]

By Peter Krauth, Global Resources Specialist, Money Morning

Silver prices soared as high as $50 an ounce last year before experiencing a brief correction that took it back below $30.

However, despite this blip, mounting inflationary pressures, a weakening dollar, and emerging market demand will see silver retest its record highs in 2012. In fact, this time around it could even climb as high as $150 an ounce.

The white metal has already gotten off to a strong start this year, with silver for March delivery surging 5.9% on Tuesday to settle at $29.57 an ounce – the biggest one-day gain in months.

And it's just getting started. So if you don't want to miss the next big bull-run, you might consider the following instructions on how to buy silver.

How to Buy Silver

Like gold, silver investments can be made in a variety of forms. Let's take a look at some of the most popular forms.

Physical Silver: Physical silver can be purchased in a variety of sizes and weights, which determines its price. Most typical are 1.0 ounce silver coins, like the Austrian Silver Philharmonic, the American Silver Eagle, and the Canadian Silver Maple.

Their prices vary slightly due to differences in silver purity, with the Silver Maple being the highest at 99.99% pure. You'll pay about a 16% premium over the silver price for coins due to the cost of fabricating them.

Another popular option is the 100-ounce silver bar, which commands a 5% premium over the spot price of silver.

These coins and bars are essentially bought for their silver content and not as collectibles. If you're looking to build a silver stash – either large or small – bullion dealers may be the easiest way for investors to do so. But do your homework first, and check them out before you buy. Also, avoid paying more than the premiums I noted above for either coins or bars.

Some investors wonder if they should buy smaller denominations, like 1/20th, 1/10th, ¼, or ½ ounce (gold) coins. The thinking goes like this: If ever these coins need to be used to transact and make payments, one would want to have smaller "amounts" to carry around. That's a valid rationale. Even so, keep in mind that you'll pay a premium to the actual silver content, since each individual coin has to be fabricated. I believe that, should we ever get to that point, you could just convert a one-ounce coin or bar into a number of smaller coins, and pay the premium, or perhaps receive whatever else is being used for transactions (a new currency?) in return.

A few dealers that have an established reputation are:

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We're Closing In On a 70% Dividend

December 19, 2011

By Peter Krauth, Global Resources Specialist, Money Morning

Lately, it seems billionaire precious metals investor Eric Sprott is grabbing headlines almost daily.

Sprott believes in silver and gold as money, and he has little faith in paper currencies.

That explains his recent acquisition of a chain of currency exchange outlets, which he aims to gradually build into the safest kind of bank – one that makes no loans, and could eventually offer gold- and silver-backed checking accounts.

Leave it to Sprott to flip a long established business model on its head.

And now he's at it again.

Ever the investing activist, Sprott's latest move involves a "call to action" for silver producers, challenging a business practice typical of most – saving in cash.

Sprott has sent a letter to silver producers, suggesting that they reinvest some 25% of their earnings back into silver, rather than in cash at the bank.

On the surface, it doesn't look like such a dramatic step.

But after deeper analysis, it's clear such a move will accomplish two significant things for shareholders:

  • It will heighten exposure to a commodity that the investor initially bought those shares for.
  • And it will protect the investor from the risk of devaluing currencies the company would have held instead.

In fact, the move is brilliant.

And as I keep digging, I realize that the implications go well beyond these two shareholder advantages.

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Don't Be Fooled by Gold's Recent Dip – We'll Still See $2,000 an Ounce in 2012

December 15, 2011

By Kerri Shannon, Associate Editor, Money Morning

If you're concerned about where gold prices are headed after yesterday's (Wednesday's) bear-market buzz, don't be. This is just a brief pit-stop in what continues to be an epic bull-run for the yellow metal.

Gold prices fell below $1,600 an ounce Wednesday for the first time since October, settling down nearly 5% at $1,586.90 an ounce Comex division of the New York Mercantile Exchange (NYMEX). That's below the closely-watched 200-day moving average for the first time since January.

There are a few reasons for this slump: Panic over the Eurozone and its weakening currency, banks' need for cash, and year-end profit-taking have all taken their toll on gold this week.

Still, while gold prices may be stumbling right now, they are not headed for a long-term bear market – not even close. In fact, it's something our own gold and global resources specialist predicted months ago.

Money Morning Global Resources Specialist Peter Krauth said as far back as August that gold prices were due for a pull-back, so this minor blip isn't surprising – and it definitely isn't permanent.

"This is something I saw coming," said Krauth. "Back in late August, as gold was pushing $1,900, I told my subscribers it was due to pull back, and likely to trade in a range between $1,600 and $1,800, and that's exactly what we've seen so far. We could see a bit more weakness, but I think we're much closer to a bottom at this point."

Here's why.

A Weak Euro and the Scramble for Cash

One of the biggest factors contributing to lower gold prices is the Eurozone and its increasingly weak currency. The euro fell Wednesday to $1.2998 against the dollar, its lowest level since January. That forced many traders into the dollar.

"As investors flee the euro, the "risk off' trade means they're falling back on the U.S. dollar," said Krauth. "A higher U.S. dollar, in turn, means lower gold because gold is priced in U.S. dollars."

Krauth said Europe's economic turmoil has forced the region's banks to hunt for more cash, which has led to more gold leasing transactions, further pressuring the precious metal's price.

"European commercial banks are desperate for cash," said Krauth. "They could well be "borrowing' central bank or other sourced gold to lend out simply to raise cash temporarily. Interestingly, gold lease rates just spiked back up on Dec. 7, the very same day we started that recent bout of gold price weakness."

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Gold Prices Back on Track for $2,500 an Ounce

October 26, 2011

By Jason Simpkins, Managing Editor, Money Morning

Tags: buy gold, Gold Prices, gold prices chart, gold prices history, historical gold prices, selling gold, silver prices

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Don't Miss Out as Silver Prices Surge to
$150 an Ounce

September 16, 2011

By Martin Hutchinson, Global Investing Strategist, Money Morning

Silver prices had an exciting run-up in the year ending in April – they almost tripled, briefly touching $50 an ounce before settling back down to the low $30s.

Now, silver prices are back above $40 an ounce. That may have you feeling the urge to sell – but don't.

Resist the temptation to sell silver because this recovery is for real, and it has much further to go.

In fact, I anticipate silver prices will peak at $150 an ounce within the next 12-18 months.

The reason is simple: With central banks around the world pushing lax monetary policies, prices for all commodities – gold and silver in particular – will invariably rise.

We've already seen this happen with gold hitting a record high $1,923.70 an ounce on Sept. 7. And when gold goes higher, silver quickly follows.

That's reflected in something called the "gold/silver ratio," which shows how many ounces of silver it takes to buy one ounce of gold. Traditionally, this ratio acts as a price barometer for the two precious metals. And if you look at it right now, it's easy to see that $150 silver isn't far in the offing.

The Gold/Silver Ratio

Gold and silver prices traditionally move together because both are considered stores of value in inflationary times. And while we think of gold as the premier store of value, remembering the 19th century gold standard, other societies – notably the Spanish empire in the Americas, Imperial China and Mogul India – used the silver standard and are hence more focused on silver when inflation threatens.

In the 19th century and before, silver and gold prices maintained a fairly steady relationship to each other in a ratio of 16 to 1. Silver depreciated against gold in the 20th century. However, it also acquired industrial uses, which is something gold never did (the two metals are chemically very similar, but silver is much cheaper and hence more suitable for industrial uses).

The gold/silver ratio briefly approached 16 to 1 in the 1980 precious metals bubble (silver peaked at $50 per ounce, gold at $875) but then fell back beyond 50 to 1, with gold trading around $250 an ounce in the late 1990s, while silver was below $5 an ounce.

Gold was the first to take off after 2000. And by 2010, gold traded well above $1,000 an ounce while silver traded at $12-$14 an ounce – a ratio of close to 80 to 1. This was unsustainable, and it resulted in the price rise of 2010-11, which at its peak took silver to $50 an ounce and about a 30 to 1 ratio to the price of gold.

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U.S. Debt Sends Silver Prices Soaring: The No. 1 Investment To Profit As Silver Hits $250

August 5, 2011

Money Morning Staff Reports

Silver is better than gold.

In fact, it's poised to be the "Greatest Trade Ever."

I know that's a big statement. I'm certain that it grabbed your attention. Perhaps you're even considering arguments that would shoot it down.

But I know what I'm saying. And here's the proof.

Industrial Demand Set to Drive a Rebound in Silver Prices

May 4, 2011

By Larry D. Spears, Contributing Writer, Money Morning

After a shocking upward climb to nearly $50 an ounce, silver prices have been walloped over the past two days – plunging to $41.50 an ounce in afternoon trading yesterday (Tuesday).

But regardless of this sharp decline, now isn't the time to panic. After all, the U.S. Federal Reserve has given no indication that it plans to tighten monetary policy anytime soon, and as a result the dollar continues to weaken.

That bodes well for all precious metals, which serve well as a store of value. Furthermore, silver has another trump card – its widespread use in industry and manufacturing.

The "Greatest Trade Ever:" Three Reasons That Silver Prices Still Have Room to Run

April 29, 2011

[Editor's Note: Silver prices surged another 3.4% to close at $47.52 an ounce yesterday (Thursday), and traded as high as $49.52 - price levels not seen since the Hunt Brothers tried to corner the silver market back in 1980. Money Morning's Peter Krauth tells us why there's more to come, and why - even with a correction - silver could turn out to be the "Greatest Trade Ever."]

By Peter Krauth, Global Resources Specialist, Money Morning

Silver is better than gold.

In fact, it's poised to be the "Greatest Trade Ever."

I know that's a big statement. I'm certain that it grabbed your attention. Perhaps you're even considering arguments that would shoot it down.

But I know what I'm saying. And here's the proof.

You can look at silver prices and see that as an investment, silver has been a better performer than gold over the past 10 years. What's more, silver is actually gaining momentum.

And here's the best part: I see three specific – and very powerful – catalysts that should propel silver prices higher and enable this "other" precious metal to further outdistance gold in the months and years to come.

Let me show you what I mean.

To discover the silver investments to make now, please read on…

Silver Options Strategies: How to Pay a Bargain Price for the White Metal

April 19, 2011

By Larry D. Spears, Contributing Writer, Money Morning

In last Wednesday's Money Morning special report on silver, several of our financial gurus projected higher prices ahead for "the other precious metal." Since then, silver has climbed about 5% — hitting $43 an ounce yesterday (Monday). Silver is now nearing its record high of $50.35 set in January 1980.

For those with significant profits already in hand from silver's hot streak, Money Morning has offered some strategies for protecting those gains against a near-term pullback. But if you haven't yet jumped on the silver bandwagon, don't worry. You can still climb aboard without risking too much.